ECON Test Review

If aggregate demand shifts right, then eventually price level expectations rise. The increase in price level expectations causes the short run aggregate supply curve to shift to the left.

True

Flase

Which of the following would increase output in the short run?

An increase in stock prices makes people feel wealthier

Firms chose to purchase more investment goods

Government spending increases

All of the above are correct

Suppose the economy is in long run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

Rise. This rise in price expectations shifts the short run aggregate supply curve to the right.

Fall. This fall in price expectations shifts the short run aggregate supply curve to the left.

Rise. This rise in price expectations shifts the short run aggregate supply curve to the left.

Fall. This fall in price expectations shifts the short run aggregate supply curve to the right.

Suppose the economy is in long run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long run equilibrium?

As people revise their price level expectations upward, firms and workers strike bargains for higher nominal wages.

As people revise their price level expectations downward, firms and workers strike bargains for lower nominal wages

As people revise their price level expectations upward, firms and workers strike bargains for lower nominal wages.

As people revise their price level expectations downward, firms and workers strike bargains for higher nominal wages

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

Aggregate supply to the right.

Aggregate demand to the left

Aggregate supply to the left.

aggregate demand to the right.

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting

Aggregate supply right.

Aggregate demand left.

Aggregate supply left.

Aggregate demand right.

Which of the following would cause stagflation?

Aggregate demand shifts right

Aggregate supply shifts left

Aggregate demand shifts left

Aggregate supply shifts right

Suppose the economy is in long run equilibrium. If there is an increase in government purchases at the same time there is a large increase in the price of oil, then in the short run

Real GDP will rise and the price level might rise, fall, or stay the same.

the price level will fall, and real GDP might rise, fall, or stay the same.

Real GDP will fall and the price level might rise, fall, or stay the same.

The price level will rise, and real GDP might rise, fall, or stay the same.

In the mid 1970s the price of oil rose dramatically. This

Shifted aggregate supply left, the price level rose, and real GDP fell.

Caused an increase in U.S. Prices and real GDP.

Caused U.S. Prices to fall, and real GDP rose.

Caused a decrease in U.S. Prices and real GDP.

Which of the following would help explain why the aggregate demand curve slopes downward?

An unexpectedly low price level raises the real wage, which causes firms to hire fewer workers and produce a smaller quantity of goods and services.

A lower price level reduces the interest rate, which encourages greater spending on investment goods

A lower price level causes domestic interest rates to rise and the real exchange rate to appreciate, which stimulates spending on net exports.

A higher price level increases real wealth, which stimulates spending on consumption.

When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded?

the real value of wealth

The value of currency in the market for foreign exchange

The interest rate

All of the above are correct.

During recessions declines in investment account for about

1/6 of the decline in real GDP.

2/3 of the decline in real GDP.

1/7 of the decline in real GDP.

1/3 of the decline in real GDP.

A decrease in taxes would move the economy from C to

B in the short run and the long run.

D in the short run and C in the long run.

D in the short run and the long run

B in the short run and A in the long run.

Which part of real GDP fluctuates most over the course of the business cycle?

Consumption expenditures

Net exports

Government expenditures

Investment expenditures

Other things the same, as the price level falls, the exchange rate rises. A rise in the exchange rate leads to a decrease in net exports

True

False

The aggregate quantity of goods and services demanded changes as the price level rises because

Real wealth falls, interest rates rise, and the dollar appreciates.

real wealth rises, interest rates fall, and the dollar depreciates.

Real wealth falls, interest rates rise, and the dollar depreciates.

Real wealth rises, interest rates fall, and the dollar appreciates.

The exchange rate effect is the idea that a higher U.S. Price level causes the value of the dollar to increase in foreign exchange markets, and this effect contributes to the downward slope of the aggregate demand curve.

True

False

When the price level increases, the real value of people's money holdings

Falls, so they buy more.

Rises, so they buy less.

Falls, so they buy less.

Rises, so they buy more.

If speculators bid up the value of the dollar in the market for foreign currency exchange, U.S. Aggregate demand would shift to the left.

True

False

The effect of a change in the value of the dollar in the foreign exchange market due to a change in the price level helps explain the slope of aggregate demand, but does not shift it. The effects of a change in the value of the dollar in the foreign exchange market due to speculation is shown by shifting the aggregate demand curve.

True

False

Aggregate demand includes

the quantity of goods and services the government, households, firms, and customers abroad want to buy

The quantity of goods and services households and firms want to buy, but not the quantity of goods and services the government wants to buy.

Neither the quantity of goods and services the government, households, nor firms want to buy nor the quantity of goods and services customers abroad want to buy.

The quantity of goods and service the government wants to buy, but not the quantity of goods and services households, firms, or customers abroad want to buy.

Which of the following would not be included in aggregate demand?

An increase in firms' inventories

Government's tax collections

Purchases of goods by households

Firms' purchases of newly produced machinery

Other things the same, when the price level rises, interest rates

Rise, so firms increase investment

Fall, so firms decrease investment

Rise, so firms decrease investment

Fall, so firms increase investment

If output is above its natural rate, then according to sticky wage theory

Workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce less at any given price level.

Workers and firms will strike bargains for higher wages. In response to the higher wages firms will produce more at any given price level.

Workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce more at any given price level.

Will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.

The position of the long run aggregate supply curve

Is determined by resource usage and technology.

is at the point where the economy would cease to grow.

Is at the point where the unemployment rate is zero.

Shifts to the right when the money supply increases.

The long run aggregate supply curve shifts right if

Immigration from abroad increases

Technology advances

The capital stock increases

All of the above are correct

The shift of the short run aggregate supply curve from SRAS1 to SRAS2

Could be caused by an outbreak of war in the Middle East.

Causes the economy to experience stagflation.

Could be caused by a decrease in the expected price level.

Causes the economy to experience an increase in the unemployment rate.

An increase in the actual price level does not shift the short run aggregate supply curve, but an expected increase in the price level shifts the short run aggregate supply curve to the left.

True

False

The sticky wage theory of the short run aggregate supply curve says that when the price level is lower than expected,

Production is more profitable and employment rises.

Production is less profitable and employment falls.

Production is more profitable and employment falls

production is less profitable and employment rises.

If the price level rises above what was expected and nominal wages are fixed, then

Production becomes less profitable so firms will hire fewer workers.

Production becomes more profitable so firms will hire more workers.

production becomes less profitable so firms will hire more workers.

Production becomes more profitable so firms will hire fewer workers.

The sticky price theory implies that

The short run aggregate supply curve is upwardsloping

menu costs influence the speed of adjustment of prices.

an unexpected fall in the price level induces firms to reduce the quantity of goods and services they produce.

All of the above are correct.

Other things the same, when the price level rises more than expected, some firms will have

Higher than desired prices, which increases their sales.

Lower than desired prices, which depresses their sales.

higher than desired prices, which depresses their sales.

Lower than desired prices, which increases their sales.

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